U.S. Refining Industry In Flux

No new refineries have been built in the U.S. since the 1970s. That does not mean refinery capacity is dropping. Refiners can increase capacity at existing sites by upgrading equipment and adding new processes. This is much simpler and cheaper than building a new refinery from scratch.

Because of these upgrades the U.S. crude oil distillation capacity declined in the early 1980s, it has risen since the mid-1990s due to these kinds of investments. From 1997 to 2009, total U.S. refining capacity increased by 14 percent, with the average annual capacity increase of about 185 thousand barrels per day (Mbbl/d) over this period, equivalent to adding one and a half average-sized refineries each year.

Despite the growth in refinery capacity, the number of refineries and refining companies has actually declined in recent years. The capacity of the average refinery increased from 94 Mbbl/d in 1997 to 118 Mbbl/d in 2009 (25 percent) and the average capacity per refining company rose from 196 Mbbl/d in 1997 to 310 Mbbl/d in 2009 (58 percent). Several large mergers occurred over this period.

The second and fourth largest refiners in 1997 merged to become Exxon Mobil Corporation, and BP, the ninth largest in 1997, acquired Amoco, number three in 1997 (Table 1). But the most remarkable rise was that of Valero Energy Corporation. In 1997, Valero ranked 51st based on refining capacity with one small refinery.

By 2009, Valero attained the position of the largest U.S. refiner with 14 refineries and 2 million barrels per day of capacity. The share of U.S. refining capacity for the top four companies increased from 26 percent in 1997 to 40 percent in 2009, while the top 10 share went from 51 percent to 69%.

Net refining margins and return on investment reached historic high levels from 2004 to 2007, encouraging several companies to announce expansion plans. Over the past several quarters, however, refining margins have declined sharply. Furthermore, petroleum product demand has declined in recent years and renewable fuels are making inroads into the market.

The past 12 years have clearly been a period of significant change in the U.S. refining industry, reflecting the evolution of both markets and policies. With continued market and policy uncertainties ahead, the structure of the refining industry is likely to keep on changing.